Purpose/Intention

In concluding that interest on a bank loan to fund a share subscription for shares of a company in financial difficulty (“Vidabode”) by the taxpayer (“Keybrand”) was non-deductible, given “that Keybrand did not have a reasonable expectation of income in acquiring the shares of Vidabode and hence did not borrow the money for the purpose of earning income from property” (para. 76), Webb JA indicated that two subsequent steps confirmed the absence of such an expectation at the subscription time, namely, the appointment of a receiver an very short time later, and the claiming of a loss under s. 50(1)(b)(iii)) on its shares of Vidabode in its return for its taxation year around four months later. In this regard, he noted (at para. 74) the statement in Symes that “Courts will … look for objective manifestations of purpose,” and then stated (at para. 76):

[S]ubsequent actions or steps taken by Keybrand or [its parent] BWS could be used to either confirm or contradict Keybrand’s stated purpose in borrowing the funds to acquire the shares of Vidabode.

An individual with a significant long-term holding in common shares of a public company (BNS) entered into a cash-settled forward which had the effect of establishing a short position against a portion of his BNS shareholding. Starting about seven years later, he started closing out the forward at a loss. The Tax Court had accepted the taxpayer’s testimony that he had intended to profit from the anticipated decline in the value of the BNS shares under the forward contract but nevertheless retained ownership of the shares based on his belief that they would perform well in the long term.

In affirming the Federal Court of Appeal’s decision to reverse this decision on the basis of objective indications that the forward sales hedged the taxpayer’s BNS holding, Abella J stated (at para. 22):

A long line of jurisprudence supports the conclusion that the characterization of a derivative contract as a hedge turns on the contract’s purpose. Purpose is ascertained objectively (Ludco …). While subjective manifestations of purpose may sometimes be relevant, the taxpayer’s stated intention … is not determinative. The taxpayer’s conduct is generally more revealing than “ex post facto declarations” of the taxpayer … . As the cases demonstrate, the primary source of ascertaining a derivative contract’s purpose is the linkage between the derivative contract and any underlying asset, liability or transaction purportedly hedged. The more closely the derivative contract is linked to the item it is said to hedge, the stronger the inference that the purpose of the derivative contract was hedging. The income tax treatment of gains and losses arising from derivative contracts depends on whether the derivative contract is characterized as a hedge or speculation. Gains and losses arising from hedging derivative contracts take on the character of the underlying asset, liability or transaction being hedged … . In contrast, speculative derivative contracts are characterized on their own terms, independent of an underlying asset or transaction.

The trial Judge found that a purchase of a townhome satisfied ETA s. 254(2)(b) because at the time of the agreement of purchase and sale, the appellant intended to use the property as her primary place of residence. Dawson JA accepted (at para. 7) the Crown's submission that the trial judge was “required at law to have regard to objective manifestations of purpose (Symes v. Canada, [1993] 4 S.C.R. 695, at page 736,” but went on to find (at paras. 10-12) that it was inappropriate to infer that the trial judge had failed to do so having regard to the presumption:

that “[t]rial judges are presumed to know the law with which they work day in and day out” (F.H. v. McDougall, 2008 SCC 53, [2008] 3 S.C.R. 41, at paragraph 54… .)

Before affirming a finding of Paris J that the taxpayer's wife had not established an income-producing purpose for money borrowed by her to acquire shares of a family company, Dawson JA stated (at para. 8) that "where the purpose or intention behind an action is to be ascertained, a court should objectively determine the purpose, guided by both objective and subjective manifestations of purpose." Paris J (contrary to the taxpayer's submission) had, in fact given weight to a number of objective manifestations of purpose.

The Tax Court had allowed a deduction for only a portion of the purchase price for seismic data purchased by two joint exploration corporations and renounced to the taxpayer on the basis that only a portion of the seismic data had been acquired for the required purpose. Sharlow JA stated (at para. 34):

[T]he statutory purpose test…may be met by an expenditure which is made for more than one purpose…

Rothstein JA stated (respecting a situation where the predominant purpose of making a loan was to assist the taxpayer’s son) that a “subordinate purpose” of generating interest or dividend income is sufficient to satisfy the income-producing purpose test in s. 40(2)(g)(ii).

Before going on to consider whether the taxpayer had borrowed money for an income-producing purpose, Iacobucci J. stated (at p. 5514):

"In the interpretation of the Act, as in other areas of law, where purpose or intention behind actions is to be ascertained, courts should objectively determine the nature of the purpose, guided by both subjective and objective manifestations of purpose ... . In the result, the requisite test to determine the purpose for interest deductibility under s. 20(1)(c)(i) is whether, considering all the circumstances, the taxpayer had a reasonable expectation of income at the time the investment is made."

Before finding that the taxpayers had not entered into an arrangement with the requisite intention to be partners, the Court stated (at p. 5154) that "motivation is that which stimulates a person to act, and intention is a person's objective or purpose in acting. This Court has repeatedly held that a tax motivation does not derogate from the validity of transactions for tax purposes ...".

Before going on to find that the decision to purchase farm land by the corporation originated with its shareholders, Sharlow J. stated (at p. 5707):

"that the intention of a corporation is that of the natural persons by whom it is managed and controlled ... . In the case of a widely held public corporation, the requisite intention may be that of a corporate officer or a group of officers or directors who made the purchasing decision. The intention of a closely held corporation, however, is normally that of the shareholders."

In light of the additional word in s. 15(1.1) referring to "it may reasonably be considered", the Tax Court Judge had erred in finding that the relevant purpose must be the conscious intent of the taxpayer. Rather than a subjective test, the quoted words clearly indicated that the evidence of necessary intent could be established if in the circumstances it was reasonable to consider that this was one of the purposes of the payment.

Robertson J.A. stated (at p. 5135) after discussing jurisprudence on paragraph 20(1)(c):

"... I see nothing in the jurisprudence ... which requires a subjective appreciation of the motives or intent underlying the taxpayer's decision to borrow funds ... . The words 'use' and 'purpose' are used in paragraph 20(1)(c) in an objective not subjective sense."

"It has often been repeated in tax matters that assertions by a taxpayer as to his intentions are only persuasive to the extent that they may be directly or indirectly confirmed by or be consistent with overt and objective fact."

[C.R.: "Evidence"]

It was found that any change of intention by a non-controlling member of a syndicate ("Schneider") to hold his interest in the real property of the syndicate as capital property rather than inventory, did not entail a change of intention by the syndicate. Urie, J. stated that where the participants in a transaction "all are to greater or lesser degrees active, (as here) the most active participant's intention (in this case Schneider's) must be enveloped by that of the consortium as a whole, even if, alone, his purpose would have been different."

The intention of a company of which one person is the sole shareholder, director and officer, is the intention of that person.

The intention of the German parent of the taxpayer in negotiating a contract for the cancellation of a franchise prior to the incorporation of the taxpayer, was attributed to the taxpayer for the purpose of determining the tax treatment of payments made by the taxpayer pursuant to the contract.

The intentions of the dominant member of a land-development syndicate were attributed to the taxpayer, which was a more passive member, for the purpose of determining whether it had acquired its interest in the syndicate lands on capital account.

"The motivation or motivations which lead a person to make a purchase of land are always questions of fact. What the purchaser says on this point must always be considered, but it may not be decisive. Particularly is this the case when the motives or intention he ascribes for the purchase would result in a sustantial financial benefit to himself. The purchaser's actions and other circumstances may be a far better guide to his true motives than are his statements about them."

Walsh, J. stated: "The intent of this closely held company can only be determined by examing the intent of the shareholders of it and in particular the principal and controlling shareholder. The intent must be determined as of the date of purchase".